On April 15th 2019, one of the biggest corporate law suits of recent years was ready to put itself into motion in a four-week trial that would’ve seen 30$Bn and much more put at stake. The underlying law suit is the one between Apple and Qualcomm, tech giants who have now been at war with one another since 2017. However, the court battle which promised to keep the everybody’s attention for quite a while never actually took off, as the day after the start of the trial - April 16th - both Apple and Qualcomm jointly declared that they had decided to drop all litigations with one another worldwide. This was seen as a positive surprise and was treated as good news by many investors as it gave rise to an appreciation in the stock price of Qualcomm as shown in Graph 1(as the price jumped in two days from 57.18$ to 79.08$, for an increase in value of 38%) but surprisingly it didn’t change by much the price of Apple’s stocks.
The news was a bit of a stagger for both the smartphone and the semiconductor industry. The frictions between the two U.S. tech companies had started in January of 2017 when Qualcomm was accused by the Federal Trade Commission of monopolistic behavior.
Qualcomm business model revolves around both the manufacturing & selling of chips and the licensing of what are defined as standard essential patents for the production of smartphone chips. What caught the attention of the FTC back in 2017 were primarily two aspects of this business model. In the first place, the fact that the Californian chip maker was forcing the smartphone companies to pay excessive royalties – as a percentage on the price of the phones sold – for licensing its patents. Furthermore, Qualcomm - according to some of its customers - was at the same time threatening to cut the supply of chips if customers refused to pay, following a business policy that became known as “no license, no chip”. Secondly, the attention was driven on the fact that the company had maintained a policy of licensing its technology exclusively to handset makers (smartphone makers) and not to other smartphone chip producers, putting a brake on potential innovation in the sector. On a similar note, South Korean authorities in late 2016 had fined Qualcomm for $854m for matters concerning patent licensing and questionable business practices. Fair trade South Korean authorities argued that the U.S. chipmaker should start licensing its technology to component suppliers, in order to foster innovation and development. Qualcomm was ready to fight tooth and nail to preserve this business model, as licenses in 2017 provided to the company around one third of its revenues, three quarters of its profits and eighty-five percent of before tax income (Exhibit on this data). Qualcomm was able to charge and obtain such aggressive fees as the company dominated the market for chips supply in the smartphone industry, as all chips were either supplied by Qualcomm or utilized technology patented by the San Diego company.
This business model was initially put under pressure by regulatory actions, but it wouldn’t start to be really threatened until Apple – which in early 2017 was one of Qualcomm’s biggest customers – decided to join in the fray.
Following the FTC accusation, in January 2017 Apple decided to step up and officially accuse Qualcomm of forcing excessive royalties. Apple sued Qualcomm for $1bn, as the smartphone maker argued that the chip company was profiting on innovations developed by Apple with which Qualcomm had nothing to do. According to Apple, this was because Qualcomm charged a percentage of the price of the phones sold in the market by its customers, given its licensing business. Since Apple is a premium phone maker, it was charged relatively higher royalty fees than its competitors and whenever a client of Apple wanted to purchase an iPhone with a new feature – for example increased memory capacity – part of the extra price that the client was paying to Apple for this feature went to Qualcomm through royalty fees. Apple – at least at the time – was determined to terminate its relationship with Qualcomm and on the basis of the argument that the San Diego company was using its monopolistic position to influence the supply of chips, it was going to sue the company, alongside four of its suppliers.
It took a bit of time for Qualcomm to think through a counteroffensive. Nevertheless, about seven months later the chipmaker company was ready to challenge Apple on a global scale as it asked for an import ban on iPhones in many countries. The counteroffensive was initiated in the United States. In July 2017 Qualcomm asked the US International Trade Commission to restrict the import of iPhones, which were assembled in Asia and subsequently exported to the United States. Qualcomm accused Apple of infringing six of its patents and demanded that all the imported iPhones which utilize Intel chips should be blocked. Qualcomm in its ITC claim made exclusive and explicit reference to iPhones which have Intel chips in them. This move by Qualcomm was done both to preserve its own chips sales and to make a favorable ruling by the ITC more probable, as it is seemed a bit difficult that the ITC would place a ban on all iPhones.
Qualcomm’s claim would eventually be dismissed by the ITC in early 2019. In the meantime, the San Diego company was kept busy up until March 2018, as Broadcom – a Singapore registered chipmaker – tried to buy Qualcomm through a hostile bid. The value of the offer was initially at around $130Bn including debt. If Broadcom had concluded successfully such a deal it would have led to the biggest M&A deal ever in the technology sector. However, the deal was never concluded as the United States president weighed in and stopped the merger on grounds of national security. According to Trump and to the US national security officials, allowing the merger to take place would’ve granted China the possibility to overtake the United States in the race for 5G. The Trump administration had no intention of letting this happen and firmly blocked the takeover.
Broadcom drained much of the attention from late 2017 to mid 2018. In that period, the fight between Apple and Qualcomm didn’t progress much other than in the ongoing court trials. It wasn’t until September 2018 that Qualcomm re-ignited the fight with a new accusation against Apple and its new and exclusive chip supplier Intel. The San Diego company accused Apple of sharing to Intel Qualcomm’s confidential information and trade secrets which have allowed Intel to improve its performance significantly.
Intel, which had already been brought on board by Apple in September 2016 – when Qualcomm was still a supplier – found itself in 2018 as the exclusive supplier of smartphone chips for Apple. Intel, despite being a market leader for PC chips, had relatively limited experience and technology in the market of smartphone chips. This fact initially did not seem to be a problem for Apple. However, as Intel continued to delay the release of its 5G chips, things changed. It became clear to Apple’s management that they couldn’t fully rely on the Santa Clara company for 5G chips. The possibility of arriving late to the next generation of smartphones was off the table, as the iPhone maker – while trying to expand itself into other areas – is still strongly dependant for its revenues on the sales of premium smartphones and cannot afford to make any big mistakes in this market. Apple’s desire – or need – to be fully prepared for the 5G era and for the next generation of smartphones was probably the driving factors that brought it to terminate its fight and settle its legal disputes with Qualcomm in April 2019. The Californian companies will now join forces once again in the new 5G era.
As mentioned, the settlement of litigations brought a big stock price appreciation for Qualcomm while little to no stock price movement for Apple. According to some analysts, this might be interpreted as a signal that Apple ultimately lost the fight with Qualcomm. The Cupertino company found itself left with no options and was forced to go back to its old supplier in order to avoid any possible repercussions on its future iPhone models.
Nevertheless, while going back to Qualcomm, Apple is also trying to strengthen its competitive position in smartphone chips for the future. Before officially settling its dispute with Qualcomm, the iPhone maker decided to hire the former head of 5G development at Intel, as the Santa Clara company decided to officially shut down its smartphone chip department and focus exclusively on the chips for PCs. The role of the former Intel employee in Apple has not yet been officially disclosed, but many speculate that he will work with Qualcomm in the optimization of 5G technology for the new generation of iPhones. Some wonder if this might be a move by Apple to acquire the technology that it needs for producing smartphone chips on its own and to be able to move away from Qualcomm, this time for good.
Federico Adorini
Qualcomm business model revolves around both the manufacturing & selling of chips and the licensing of what are defined as standard essential patents for the production of smartphone chips. What caught the attention of the FTC back in 2017 were primarily two aspects of this business model. In the first place, the fact that the Californian chip maker was forcing the smartphone companies to pay excessive royalties – as a percentage on the price of the phones sold – for licensing its patents. Furthermore, Qualcomm - according to some of its customers - was at the same time threatening to cut the supply of chips if customers refused to pay, following a business policy that became known as “no license, no chip”. Secondly, the attention was driven on the fact that the company had maintained a policy of licensing its technology exclusively to handset makers (smartphone makers) and not to other smartphone chip producers, putting a brake on potential innovation in the sector. On a similar note, South Korean authorities in late 2016 had fined Qualcomm for $854m for matters concerning patent licensing and questionable business practices. Fair trade South Korean authorities argued that the U.S. chipmaker should start licensing its technology to component suppliers, in order to foster innovation and development. Qualcomm was ready to fight tooth and nail to preserve this business model, as licenses in 2017 provided to the company around one third of its revenues, three quarters of its profits and eighty-five percent of before tax income (Exhibit on this data). Qualcomm was able to charge and obtain such aggressive fees as the company dominated the market for chips supply in the smartphone industry, as all chips were either supplied by Qualcomm or utilized technology patented by the San Diego company.
This business model was initially put under pressure by regulatory actions, but it wouldn’t start to be really threatened until Apple – which in early 2017 was one of Qualcomm’s biggest customers – decided to join in the fray.
Following the FTC accusation, in January 2017 Apple decided to step up and officially accuse Qualcomm of forcing excessive royalties. Apple sued Qualcomm for $1bn, as the smartphone maker argued that the chip company was profiting on innovations developed by Apple with which Qualcomm had nothing to do. According to Apple, this was because Qualcomm charged a percentage of the price of the phones sold in the market by its customers, given its licensing business. Since Apple is a premium phone maker, it was charged relatively higher royalty fees than its competitors and whenever a client of Apple wanted to purchase an iPhone with a new feature – for example increased memory capacity – part of the extra price that the client was paying to Apple for this feature went to Qualcomm through royalty fees. Apple – at least at the time – was determined to terminate its relationship with Qualcomm and on the basis of the argument that the San Diego company was using its monopolistic position to influence the supply of chips, it was going to sue the company, alongside four of its suppliers.
It took a bit of time for Qualcomm to think through a counteroffensive. Nevertheless, about seven months later the chipmaker company was ready to challenge Apple on a global scale as it asked for an import ban on iPhones in many countries. The counteroffensive was initiated in the United States. In July 2017 Qualcomm asked the US International Trade Commission to restrict the import of iPhones, which were assembled in Asia and subsequently exported to the United States. Qualcomm accused Apple of infringing six of its patents and demanded that all the imported iPhones which utilize Intel chips should be blocked. Qualcomm in its ITC claim made exclusive and explicit reference to iPhones which have Intel chips in them. This move by Qualcomm was done both to preserve its own chips sales and to make a favorable ruling by the ITC more probable, as it is seemed a bit difficult that the ITC would place a ban on all iPhones.
Qualcomm’s claim would eventually be dismissed by the ITC in early 2019. In the meantime, the San Diego company was kept busy up until March 2018, as Broadcom – a Singapore registered chipmaker – tried to buy Qualcomm through a hostile bid. The value of the offer was initially at around $130Bn including debt. If Broadcom had concluded successfully such a deal it would have led to the biggest M&A deal ever in the technology sector. However, the deal was never concluded as the United States president weighed in and stopped the merger on grounds of national security. According to Trump and to the US national security officials, allowing the merger to take place would’ve granted China the possibility to overtake the United States in the race for 5G. The Trump administration had no intention of letting this happen and firmly blocked the takeover.
Broadcom drained much of the attention from late 2017 to mid 2018. In that period, the fight between Apple and Qualcomm didn’t progress much other than in the ongoing court trials. It wasn’t until September 2018 that Qualcomm re-ignited the fight with a new accusation against Apple and its new and exclusive chip supplier Intel. The San Diego company accused Apple of sharing to Intel Qualcomm’s confidential information and trade secrets which have allowed Intel to improve its performance significantly.
Intel, which had already been brought on board by Apple in September 2016 – when Qualcomm was still a supplier – found itself in 2018 as the exclusive supplier of smartphone chips for Apple. Intel, despite being a market leader for PC chips, had relatively limited experience and technology in the market of smartphone chips. This fact initially did not seem to be a problem for Apple. However, as Intel continued to delay the release of its 5G chips, things changed. It became clear to Apple’s management that they couldn’t fully rely on the Santa Clara company for 5G chips. The possibility of arriving late to the next generation of smartphones was off the table, as the iPhone maker – while trying to expand itself into other areas – is still strongly dependant for its revenues on the sales of premium smartphones and cannot afford to make any big mistakes in this market. Apple’s desire – or need – to be fully prepared for the 5G era and for the next generation of smartphones was probably the driving factors that brought it to terminate its fight and settle its legal disputes with Qualcomm in April 2019. The Californian companies will now join forces once again in the new 5G era.
As mentioned, the settlement of litigations brought a big stock price appreciation for Qualcomm while little to no stock price movement for Apple. According to some analysts, this might be interpreted as a signal that Apple ultimately lost the fight with Qualcomm. The Cupertino company found itself left with no options and was forced to go back to its old supplier in order to avoid any possible repercussions on its future iPhone models.
Nevertheless, while going back to Qualcomm, Apple is also trying to strengthen its competitive position in smartphone chips for the future. Before officially settling its dispute with Qualcomm, the iPhone maker decided to hire the former head of 5G development at Intel, as the Santa Clara company decided to officially shut down its smartphone chip department and focus exclusively on the chips for PCs. The role of the former Intel employee in Apple has not yet been officially disclosed, but many speculate that he will work with Qualcomm in the optimization of 5G technology for the new generation of iPhones. Some wonder if this might be a move by Apple to acquire the technology that it needs for producing smartphone chips on its own and to be able to move away from Qualcomm, this time for good.
Federico Adorini